ICB report: two potential options

With the Independent Commission on Banking due to publish its interim report
on April 11, Deutsche Bank have identified the pros and cons of two main
options. Here is a summary of its analysis.

Banks may be forced to separate their retail and investment banking arms.

2:20PM BST 08 Apr 2011

Option one: a break-up of the Lloyds Banking Group

In looking at banks and lenders in 18 countries, Deutsche Bank found that the concentration of market share among a few companies was not as great in the UK as in most countries examined. As it stands, for example, the largest four lenders account for 61pc of the market share in Britain, compared with the greatest concentration of 94pc in South Africa.

Deutsche Bank suggested that it would undermine government credibility should this administration break up a merger approved by its Labour predecessor.

The competitive benefits may also be limited, it said, with a prospective buyer possibly lacking the economies of scale in UK.

This process is both inevitable and necessary to a certain extent, Deutsche Bank said. How this "subsidiarisation" would work, however, is unclear. The retail and investment banking arms may become wholly-owned legal entities, but retain shared services such as human resources and IT. Another proposal is operational segregation, whereby, after capital is placed in it, a unit becomes responsible for funding itself, with little leeway for operational units to finance one another.

The reduction in economies of scale could dilute the earnings of RBS by 13pc and Barclays by 20pc, according to Deutsche Bank. Although potentially a price worth paying for greater monetary policy safety in the UK, it could lead to competitive disadvantages, as regulators elsewhere are unlikely to follow suit. It also raises questions about cross-border regulation, with Deutsche Bank asking who should step in should a bank regulated abroad fail.

The government is not obliged to abide by any of the ICB’s recommendations, but the adoption of some of them is inevitable. There may still be hurdles ahead, however, as objections may be raised during the legislative process, either on a parliamentary or European level.